10. Nick Rowe thinks we should stop thinking about money as a store of value, since all goods can be stores of value. But I think this is not right...since money can (under normal circumstances) be used to buy any good, we can expect the price of money to be less volatile than the price of any good. As a store of value, money gives you a real rate of return of -inflation (unless people ditch the currency for outside money), while any consumption good gives you a real return of -depreciation + change in relative price. Hence, I feel like money has special value as a passive investment vehicle...

11 comments:

Ignoring for a moment that consumption goods are not a store of value (or at least, to the extent that they are they should be classified as capital assets), how do you earn a a real rate of -inflation holding the consumption basket? The real price of the consumption basket grows at a rate of zero, and the nominal return is +inflation.

And why would you hold money over tbills as an investment? Holding money is for criminals and tax evaders.

how do you earn a a real rate of -inflation holding the consumption basket?

Ah, you're right, that made a typo. Fixed.

And why would you hold money over tbills as an investment?

A) Liquidity, and B) different behavior under a default scenario. Mostly liquidity. And yes that is "medium of exchange" not "store of value". But Nick was asking why money is special relative to consumption goods as a store of value.

Over at the Crooked Timber Liberal blog they are going pretty crazy go nuts over David Graeber's book on Debt. Figured if you subscribed to their blog you'd include at least one link to all the hoopla.

Noah: "any consumption good gives you a real return of -depreciation + change in relative price"

Still don't agree :-)

Depreciation results from earned convenience yield, i.e. consumed services. Those constitute real returns. So the real return is just change in relative price. As a store of value though, you'd have to rent it out to get that return.

If a good is depreciating it must be yielding some benefit. Otherwise, why would it be worth more before and less later? It's worth more because it's expected to yield some consumption. E.g. a car depreciates as it yields transportation services. So a consumption good is really a capital good with a convenience yield. Only services aren't capital goods as they are instantly consumed and depreciated. A car will yield the real rate as a store of value, only if rented out for someone else to consume the transportation services. Otherwise it's a crappy store of value, paying off returns as services one might not value. But if held by the optimal consumer it yields the real rate of return.

Money's role as the medium of exchange gives it certain advantages as a store of value. Any other good can be a store of value, but before you can use it, you have to convert it to the medium of exchange. This can sometimes present non-trivial difficulties. So while money is not unique in functioning as a store of value, it has a unique advantage in that role.